Category: Pricing

Successful commercialisation requires a great technology with differentiated IP, a sound strategy with clear execution, and a little bit of unexpected foresight.

Case in point, a RIG client had a market-leading technology, a clear but simple strategy that resonated with its customers, partners and employees, and a strong execution-focused team that collaborated closely across the different functions of R&D, production, marketing, sales and support. This put the company in a winning position. However, an unexpectedly genius bit of negotiation led to the first few years of growth and sales being far smoother than previously imagined.

The technology had been incubated in university and was godfathered by one of the world’s largest energy companies who had provided clear technical specs, some development funding, and some of their business units to act as field trial partners until a commercial version of the technology was available. The quid pro quo from our client was that the energy company had exclusive access to the technology for a period of time. In order for the technology and the company to be viable and valuable, it had to unshackle itself from its customer and prove that it had worldwide application within its target market.

We had prepped and planned the negotiation for weeks on ends mapping out the various stakeholders and persons of interest within the energy company. Over a several month negotiating cycle we managed to secure a removal of their exclusivity on the technology without any change in shareholding. The key concessions were royalties over time and a Most Favoured Nation (MFN) pricing structure for the energy company. Little did we know the second thing, which we saw as a necessary evil, became one of our client’s most powerful negotiation tools.

As we started commercialising the technology out in the global energy market we discovered that there was real interest in the problem our client was solving, and a real differentiation in how they solved it. The market was keen to adopt the technology and we were able to get through the technical qualification process and identify significant problems that we could solve so that budget could be secured for initial uses of the technology. While this process wasn’t rapid, reflecting the sales cycles in the energy industry, it was smooth progress. We believed that we’d hit rough waters when it came to procurement especially as we were selling this across the world and we believed that different geographies would have different spending thresholds. Sure enough, during negotiations, having agreed all the terms and conditions, and just before producing an order, procurement teams would invariably ask for discounts saying that the budget secured was only for a certain round figure. However we knew that the problem was significant, and that our client’s technology could solve the problem best, so we stuck to our guns. However the argument we used every time, and with significant credibility, was the MFN pricing. The conversation normally lasted as long as this:

Potential customer: We’d like a 20-30% discount on the unit price of your technology. Our budget is only x. Our internal customers (the operational and technology team) want to use your technology but you have to work with us to fit the budget.

Us: I’m sorry we can’t do that. Energy Company Y has a MFN pricing agreement with us where they get 5% less than the lowest price in the market. So if we discount you by 20-25% we’d have to do the same for them and given that their volumes are an order of magnitude higher than yours, we can’t afford to do that.

Potential customer: Ok understood. We’ll prepare the order in the next day.

As you’ll note, the conversation was never about your price versus your competitors because our sales process ensured that we had identified that the problem we were solving was significant and had established in the users’ minds that our technology was best equipped to solve it. As a result, it was never a competitive scenario so the lever the customer had was at best made of rubber while ours was made of steel. It was never a lever that we had ever remotely imagined we’d have to use.

We probably trotted that line out to 30 different customers in 15 different geographies during the first couple of years of commercialisation. It worked with everyone but one: a family-owned energy company in India from who we decided to walk away from after two years of discussions and negotiations. Speaking for my countrymen, despite us seeing the value and understanding the logic, we just can’t live without a discount!

That’s the point I knew the client had lost the deal. And with the deal, the long term viability of the company.

One of the most fundamental tenets of a successful growth company is ‘making yourself easy to do business with’. I think sheer greed got in the way here, or perhaps a total misreading of the strategic situation. It was explained to me post-meeting: that development work would be costly, so something would need to be charged to the client.

Rewind.

I’d started working with the client two or three years earlier. They were selling services, charging an annual subscription fee on a headcount basis, into the people management space. Human resources has plenty of critics (/administrators), so I will not repeat them here – but to make matters worse, the client was disorganised and emotional, but worst of all it learned slowly and was subscale.

I cannot even remember quite how they got into the situation, but one of the major UK water companies was brought round to the idea of doing a pilot of the service. They certainly needed it – the management systems ‘human resources’ had in place were poorly implemented, and the Head of People knew it. The client’s service offered the opportunity to solve the problem, and in order to get well embedded (knowing such a service would always go to public tender), it was manoeuvred into a three month limited-headcount pilot.
Remember I said the client was slow learning? It must have been obvious to the water company throughout the pilot that the client was learning on the job. This is not necessarily a bad thing – learning together, which certainly needed to happen, can build bonds between a company and its customers. Quite why I was directing the learning was never clear – but I knew someone had to grip the situation, because the opportunity was too important.

Remember I said the client was subscale? Getting the water company on-board probably would have trebled the ‘people under management’, which was the key metric for this particular client. The investment in the technology and outsourced relationships needed to deliver the service was a leveraged investment – and they were short of break even. Trebling the numbers, almost at any price point, would have been enough to put the company into that happy space where bills were covered, cash was being generated, and everyone would be able to sit down and think about what to do long-term now the company was ‘washing its face’.

Pilot was completed, a big thumbs up for the concept from the water company, and then to public tender. Everyone knew three people would be pitching at the final round, and despite the obvious learning going on during the pilot, as an ‘incumbent’ (in the loosest possible use of the term), one would expect to be at that pitch. And the client was.

Now as I said before, it didn’t matter what the price point was (within reason) – all that mattered was trebling the number of people under management. So basically, unless the water company decided to totally reframe the tender at the last month, all the client needed to do was ease into pole position (with a three month head start) and they were good to go on a three year contract. On to thinking about the business and how to develop it now faces were being washed…..

Water company: “So one of your competitors, being open with you, is offering us a set of metrics over and above those which you are currently providing. Can you produce the same set of metrics?”

The data set was identical – same information going into the database, so:

Client: “Of course, not a problem …. But, er…… there will be a cost – that’s out of scope.”

(hold on, we prepared for this meeting – I don’t remember any additional costs being discussed)

Water company: “Oh …. right …. Er, how much?”

Client: “Er …… er ….. fifteen thousand pounds”

Talk about dropping the ball. This was a knock on by the wing, once it had run round the opposition’s tardy back line, and was clear through for a try.

I was asked to speak to the water company’s procurement people to get feedback, once the client had received notification that the pilot was over and the tender was lost. Apparently, and of course unsurprisingly, the water company hadn’t wanted to switch the client out – too much effort – but fifteen thousand pounds was not in the budget, and the other company was levying no extra charge.

I was on the team that put that company into administration a couple of years later.

The fifteen thousand? That would have been made in margin in year two; the client CEO, for whatever reason, justified the unilateral action to themselves at the time and came out with it. The company never ceased to be subscale.

The moral of this story? Focus on what’s important (your company’s key metric); don’t get greedy; be easy to do business with.

Are you in the process of establishing or growing an early stage web business? If so, I thoroughly recommend the ABA revenue model.

What is it, I hear you asking? It’s the “Anything But Advertising” approach.

Over the last twenty-four months we have detected a shift in the type of technology start-up being established in London. For whatever reason (and I suspect a $100bn initial public offering may have something to do with it), the proportion of B2B versus B2C businesses seems to have changed markedly. A number of commentators have already noted the number of “Global Vice Presidents of Sales” floating around the Old Street roundabout – usually residing in start-ups with two other employees (one a President and the other an Executive Vice President).

I read a nice set of statistics recently on LinkedIn’s blog that demonstrates the dangers of assuming eyes plus hours equals cash – an assumption that I fear underpins a lot of these start up businesses:

LinkedIn users spend an average of 18 minutes a month on the site. Facebook users spend 6.4 hours a month.

LinkedIn gets $1.30 in revenue for every hour those users spend on site. Facebook: 6.2 cents.

Surprising, aren’t they?

How to monetize website based business is something we’ve debating at Rapid Innovation Group recently – and I was pleased to find earlier that we are not alone in this debate, with this Wharton professor expressing a similar ABA preference. However, other than Professor Clemons no one seems to be addressing this issue.

So why wouldn’t you depend on advertising revenue as your main source of funds, other than on the basis that Facebook cannot make substantial amounts of money from it? Firstly (and sadly), when things go bad in the economy advertising revenues tend to get hammered – and secondly, how many other businesses (starting with Google) are trying to make money from the same source? Yes, the answer is lots.

I do not have a definitive answer for you, but what I will say is this: if you are creating or seeking to grow a business, you need to be looking for sustainable revenue streams. If you are providing a product or service that is to be used day in, day out, you do not want to be dependent on the vagaries of wider economic performance for your end of quarter sales figures. Identify another way of extracting value from your customers early on, have a rational reason for setting your pricing point, and then stick to your guns.

Examples you should be considering:

Do people go to your service on a regular basis? Then use a subscription model

Do your customers want different amounts of something each time they visit? Then use a transactional model

Do your customers need to understand your service before they can see value? Then use a no-charge-but-I-need-your-credit-card-details-in-advance trial model

Whatever value your service or product provides, please do not kick off into the market on the basis that your customers might be interested in a General Motors Chevy Cruze or a package holiday to Spain as a result (unless you are selling cars or Spanish package holidays)!

Pricing models and points are difficult issues for early stage businesses to address – but they set the tone for the business over the coming decade, and demark your limits of growth to an extent – so make sure you get them right!

Most readers of this blog will be interested in getting to the point that a current client finds themselves in, so I thought I’d record the process we are working through to resolve it.

Picture this: you’ve found an enthusiastic sponsor, got them to buy into your proposition ….. you then find they have opened an opportunity bigger than you could have dreamed of (or given them credit for!). The opportunity is business changing …. it smashes that sales target ….. the world is about to take a serious change for the better!

You’ve dealt with the sponsor and business user all the way through the sales process, everything makes sense …. then you hit (corporate) reality – an unhappy procurement function. Why are they unhappy? Your sponsor decided (almost certainly correctly) that if they were involved early on they’d kill the whole thing stone dead – and the business needs your software so they didn’t want it killed off early.

The call is set up, the agenda point is ominous – “commercial discussion”. That’s where we find ourselves today. Time for some scenario planning.

Position-based negotiation – a brief segue

Just like in position-based warfare, you either win or die in your trench. Positioned-based negotiation is the same – and thus to be avoided unless you have nowhere to run!

Back to the point

What will come up? In reality there are actually very few things that procurement can say / do. They either need to tick a due diligence box to say they checked it all out and understand it – or they are going to try and beat you down on price.

As I see it, there are only really three start points you should prepare for:

The price is too much

They don’t like the pricing structure

Justify the whole piece

The price is too much

So let’s start with the first point – the price is too much. The price is too much? How is that possible, we spent all that time with the business users who hold the budget working through it and making it the right fit. How can it suddenly be too much?

In my experience it can be too much because: a) procurement has a corporate target for reducing initially quoted prices e.g. everything down by 10%; b) the budget that the sponsor and business users identified got spent and they weren’t aware of it; or c) procurement isn’t particularly evolved in this corporate and is spectacularly unimaginative when it comes to negotiation!

So how to respond? Remembering to avoid a position based approach (“it’s the best we can do”), ask a question: “why is it too much? We have spent time with X and Y, who confirmed the budget was available, so you need to explain this to us”. It’s a killer – now the procurement person has to explain their rationale for their statement – if they aren’t coming clean, try a couple of other questions: “do you have a corporate target? Has the budget been spent elsewhere?” This puts you in the driving seat as you are now asking the questions.

We don’t like the pricing structure

This for me is a classic. I have a tendency to specialise in subscription-based businesses – I like the model, as it lowers the cost for users to adopt and provides the business with on-going revenue to pay its employees and further develop the software.

However, subscription-based software isn’t old hat to everyone – in fact, some people still think that all software is sold on a license / maintenance basis. This is not good, because you might have to explain the whole rationale of subscription based software to them, and then break the news that they won’t even own it – and some procurement departments hate not having something they can take away (even though in the long term they are totally powerless to develop it in house!)

There are several ways to address this:

That’s our business model – take it or leave it (bad position-based start!)

The pricing structure is like this because it reflects how we deliver the software – a lot of our costs are in on-going development for your benefit, as well as server space to deliver it across all those different geographies

Give them a quick calculation of the license / maintenance cost – hey, if they want to buy it like that then why not! So your £50k per annum software is now £127k (£115k+£12k) year one and then £12k for the following two years. Obviously that’s good for my cash flow and bad for yours, Mr Procurement, plus we won’t be able to deliver you with any of the development benefits over the three years because we are going to have to create a separate instance of the software for you on another service, and once that’s in place we won’t be able to tinker with it in case something goes wrong and affects your business

Ask them why they don’t like it – then knock off all the responses with the standard SaaS arguments – it won’t make them look good, so hopefully they will stop making stupid points fairly quickly!

Justify it…..all of it

This has to be the worst one …. not because you can’t do it, but because it takes so long to do. You have confidence in your pricing, otherwise you would not have put it in front of them, and you’ve probably already been through this with the sponsors and business users – so it’s just tedious.

Do get some practice in beforehand though – time spent in preparation is time well spent. In all likelihood the question that keeps coming up as you go through will be “why is that like that? And why is that like that?” As I said before, you have confidence in your pricing …… you are just going to have to spend a long time explaining it. And there’s always the risk that either “that’s too much” or “I don’t like that” is going to come up – if so, I reference you back up to the previous two sections.

Final Thought

Generally you don’t get to a negotiation unless the customer wants to work with you. Keep that in mind….and you’ll have a successful outcome – and lastly, the only business worth winning is profitable business!

One of the topics I like to discuss with prospective RIG-ers at interview is what the first steps are that they would undertake to plan the demand generation (i.e. marketing) strategy for one of our typical earlier stage clients. I describe this ‘typical’ client as having the following characteristics:

A market ready B2B SaaS offering

One paying customer

A recent angel investment with the objective of driving sales and marketing

There are numerous mechanisms, processes, and strategies in planning the initial stages of an effective marketing effort for such a company. However, I try and guide the discussion to the central tenet of any successful plan – the fact that you need to begin by choosing your customer. This becomes remarkably obvious to the candidate when I tell them, but it is non-the-less a vital step in any marketing strategy.

The key of course, is how to invest limited resources to maximise chances of market traction. In order to do this, you want to sell your solution to an organisation which has:

A problem / opportunity which your product solves / enables them to exploit better or cheaper than alternatives

An awareness that this problem / opportunity exists

Available budget

Now you have chosen your customer, in which markets do you find them? What is the best way to reach them? How are you able to articulate your proposition in such a way that it is most compelling? How do you make it more compelling than going with a competitor, doing nothing at all or doing something in house? How should you price the solution and what is the anticipated return on investment? How do you navigate the complex sale?

Once you have found a way to do it, how you codify this process to drive both repeatability and visibility for the purposes of revenue predictability? What are the key hires and what can be done to ensure the optimal candidate is recruited and able to perform? When is more investment required? Would growth objectives be better met if partnerships were formed in certain areas? How are the best partners found and what management processes are needed to reduce the risks of failure?

These are all the challenges we not only advise our clients on, but actively execute for them, and they are all areas that I will cover in future posts.

At this stage in the interview, the candidates are always suitably fired up about our business!